I admit that my dad taught me this when I was just a fifteen–year old kid starting a business and negotiating with suppliers for the first time. But I learned it again and again in my various business lives.
Here’s a striking example.
The most striking example was the one hundred million–dollar purchase of one of my companies by a New York private equity investor using only five million of its cash. The rest of the purchase price was concocted from a brew of zero-coupon bonds (where the face value is many times the invested amount until the reduced cost bonds mature thirty years later), and borrowing using the target company’s accounts receivable and other assets as collateral for a loan to purchase the company.
Offering too little in an acquisition to satisfy the seller?
Satisfy the seller’s need to claim a higher sales price victory by moving a substantial part of the price into a future earn–out or using the target company’s own cash to pay part of the price, or asking the seller to finance a significant piece of the sale. With the latter, you can make the price seem higher just by calculating the full amount of interest to be earned by the seller over time, adding that to the stated purchase price, and announcing a price much higher than the present value of the purchase.
Be aware of the seller’s ego and play to it…
[Email readers, continue here…] There are so many ways to satisfy a seller, sometimes a seller’s ego, by making a price seem higher than the reality of the purchase. In the investment world, if we are unable to come to terms over the valuation of a company, we sometimes add penny warrants to sweeten the deal, allowing the investors to own a larger stake in the company at any time merely by exercising the warrants. If there are enough of these, the CEO or founder can announce a valuation as high as double the actual negotiated enterprise value of the company.
Using this technique with a supplier
And how about a product purchase where you cannot come to a successfully negotiated price with your supplier? Ask for extended terms well beyond sixty or ninety days. Not only do you save the value of imputed interest, but you most likely will use, resell, collect from your customer, and even earn on the excess sales revenues deposited in your bank before you ever have to pay the supplier. Almost always, such an arrangement is more favorable than factoring or private asset lending, does not take away from your ability to borrow from other sources, and allows you to make customer promises and profits you could not have made otherwise.
The lesson: There are many ways to bridge a gap.
Don’t rule a too–high negotiated price out until you think carefully about the terms of purchase as a tool for leverage. Sometimes, the person on the other side must keep to a minimum price you cannot understand or afford. Just think of the second tool, terms, you can use creatively to bridge that gap, whether driven by seller’s ego or competitive necessity.
It’s an easy rule to remember. You name the price; I’ll name the terms. What power!